Canada dollar rallies on oil as greenback falters

Reuters Staff

5 Min Read

* Canadian dollar bounces sharply off overnight low

* Weak U.S. dollar and record oil prices fuel the gain

* Bond prices rally amid stock market selloff

By Frank Pingue

TORONTO, July 2 (Reuters) - The Canadian dollar rallied
more than a cent versus a weaker U.S. dollar on Wednesday due
to record high oil prices and weaker-than-expected economic
data that rattled the greenback.

Canadian bond prices recouped early losses and ended higher
across the curve as investors fled the stock market in favor of
more secure government debt amid economic data that added to a
darkening global outlook.

The Canadian dollar closed at C$1.0134 to the U.S. dollar,
or 98.68 U.S. cents, comfortably above the C$1.0228 to the U.S.
dollar, or 97.77 U.S. cents, that it fell to in the overnight
session.

The Bank of Canada did not provide an official closing rate
for the Canadian dollar on Tuesday because of the Canada Day
holiday. The currency closed at C$1.0197 to the U.S. dollar, or
98.06 U.S. cents, on Monday.

Spurring the Canadian dollar's rise was an economic report
that showed the U.S. private sector shed more jobs than
expected in June. The data sparked a U.S. dollar selloff and
paved the way for the Canadian currency to rally from its
overnight low.

Just after the midway point of the North American session
the commodity-linked Canadian currency rose to C$1.0090 to the
U.S. dollar, or 99.11 U.S. cents, as oil rose and eventually
hit a record high above $144 a barrel.

The surge in oil prices followed a government report that
showed U.S. crude oil inventories fell last week to their
lowest level since January.

"It's been a weaker U.S. dollar combined with record high
oil prices that is proving upside support for the Canadian
dollar," said Tyson Wright, senior foreign exchange trader at
Custom House, a currency services firm in British Columbia.

With no major Canadian data due out for the rest of the
week, Wright said the Canadian currency will trade on the back
of the European Central Bank rate decision and the monthly U.S.
report on the labor market, both of which are due on Thursday.

Market conditions are expected to become more illiquid as
the week goes on since U.S. financial markets will be closed on
Friday for Independence Day and traders may leave their desks
early for an extended weekend.

BOND PRICES BOUNCE BACK

Canadian bond prices clawed back from losses suffered early
in the session and finished mostly higher along with the bigger
U.S. Treasury market ahead of the U.S. government's monthly
report on the labor market.

The private report by ADP Employer Services, which showed
U.S. employers cut 75,000 jobs in June, likely points to bad
news in the government report, according to Mark Chandler,
fixed income strategist at RBC Capital Markets.

Chandler also said a 432-point plunge on the Toronto Stock
Exchange's main index on Wednesday likely added to the higher
bond prices.

The only piece of data still due out in Canada this week
will be Friday's Ivey Purchasing Managers Index for June, which
is prone to sharp moves since it is not seasonally adjusted.

Ivey data is expected to show that purchasing activity in
the Canadian economy rose in June but at a slightly slower pace
than in the previous month.

The two-year bond rose 4 Canadian cents to C$100.96 to
yield 3.226 percent. The 10-year bond dropped 8 Canadian cents
to C$101.87 to yield 3.751 percent.

The yield spread between the two-year and 10-year bond was
52.5 basis points, up from 49.7 at the previous close.

The 30-year bond ended up 20 Canadian cents at C$115.65 for
a yield of 4.073 percent. In the United States, the 30-year
Treasury yielded 4.510 percent.

The three-month when-issued T-bill yielded 2.52 percent,
down from 2.57 percent at the previous close.
(Editing by Peter Galloway)